Ericsson Finds a Chinese Rival Hot on Its Heels

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BARCELONA -- As long as there have been mobile phones, Ericsson has dominated the global market for equipment for wireless telecom networks, selling the biggest share of gear to mobile phone operators around the world. But last year something happened that even the longtime market leader, based in Stockholm, had never faced.

A competitor, Huawei of China, pulled even in overall sales.

The rivals have different business mixes -- Ericsson makes 43 percent of its sales by managing wireless networks, while Huawei also sells smartphones and corporate communication grids. And excluding those side businesses, Huawei's sold $25 billion of equipment to operators last year, 29 percent less than Ericsson, which remains the biggest seller of key components like data and voice lines and routers, according to Dell'Oro, a research firm in Redwood City, California.

But Huawei, an upstart founded in 1987 initially to resell telephone switches in rural China, has become a global peer of equal scale, matching Ericsson with $35.7 billion in total sales.

Momentum for the time being appears to be with Huawei, whose profit rose 33 percent last year, to 15.4 billion renminbi, or $2.5 billion, as sales rose 8 percent to 220.2 billion renminbi, according to preliminary, unaudited figures from the company, based in Shenzhen. In the same period, Ericsson's profit fell 53 percent, to 5.9 billion Swedish kronor, or $919 million, as network equipment sales dropped 11 percent, to 117.3 billion kronor.

Hans Vestberg, an Ericsson employee for 25 years who has been chief executive since January 2010, led the company's diversification into network management, an outsourcing business that has helped Ericsson offset its equipment rivalry with Huawei. During an interview, Mr. Vestberg declined to discuss Huawei directly but noted that Ericsson had hundreds of competitors, depending on the type of equipment, the type of customer and geography.

Even so, remaining the overall market leader is important, he said.

"Ericsson has been the market leader throughout its 136-year history, and my job I guess is to make sure we hold on to that for another 130," Mr. Vestberg said.

Product innovations, like antenna-integrated radio, or AIR, an antenna for a cellphone base station that has the radio transmitter built directly into the aerial to save space, electricity and cost for network operators, will keep Ericsson on top, he said.

But the rivalry, because of the increasingly strategic value of global communication networks, also has a significant geopolitical dimension. Amid national security concerns, the U.S. market for operator equipment has been essentially closed to Huawei, which was founded by Ren Zhengfei, a former engineer with the People's Liberation Army.

The largest U.S. operators have not bought from Huawei, and, last October, the U.S. House of Representatives Select Committee on Intelligence recommended that they continue to avoid purchases from Huawei and another Chinese vendor, ZTE.

The House report, which followed hearings with Chinese company executives, concluded that Huawei had not supplied the requested information on its relationship with the Chinese government and a group of 10 state-owned Chinese banks that were among Huawei's commercial lenders. The bipartisan panel, in its public report, concluded that Huawei was an extension of the Chinese government, using public subsidies to underbid and win business.

"Based on available information, the committee finds that Huawei receives substantial support from the Chinese government and Chinese state-owned banks, which is at least partially responsible for its position in the global marketplace," according to the report.

A senior executive at an American maker of network equipment said he believed Huawei to be a de facto arm of the Chinese government, receiving preferential subsidies and support that had allowed it to undercut Ericsson and the other suppliers of equipment, Alcatel-Lucent and Nokia Siemens Networks, to build its market share.

"This is not a company in the Western sense; this is part of the Chinese government's long-term plan to gain key positions in strategic industries around the world," said the executive, who declined to discuss his rival publicly. "We have seen them bid prices on contracts that have no possible relation to the market or reality as we know it."

A Huawei vice president, Scott Sykes, said the accusations and the House committee report's assertion of Chinese government interference were unfounded. Huawei is employee-owned, with no participation by the government, and receives no public subsidies or other illegal forms of support, Mr. Sykes, an American from Springfield, Massachusetts, said.

The company's equipment is being used by 500 operators around the world, he added, including 45 of the top 50. No customers have reported any security incidents, he said. Huawei recognizes that the U.S. market is largely off limits for now, but hopes that security concerns about the company's gear will eventually be overcome.

"We have an impeccable track record," said Mr. Sykes, a former public relations executive at I.B.M. and Alcatel-Lucent, a French equipment maker. "It is not about Huawei's equipment. We would say it is about trade protectionism. The rest of it -- you decide. Politics, xenophobia -- you decide."

He noted that a group of U.S. businesses has played an important role in Huawei's global expansion, advising the company on key aspects of multinational strategy. I.B.M. advises Huawei on integrated product development, the Philadelphia-based Hay Group on personnel issues, Accenture on customer relations and KPMG on accounting, Mr. Sykes said.

Only 30 percent of the components that make up Huawei equipment are produced in China, he added, and another 30 percent, like processors, come from U.S. suppliers including Qualcomm, Texas Instruments, Freescale and Broadcom.

Of Huawei's commercial lenders, 25 of 35 are non-Chinese banks, including JPMorgan Chase and Deutsche Bank. All together, foreign and Chinese lenders financed only 5.9 percent of the purchases of Huawei equipment last year, Mr. Sykes said.

Outside the United States, European and Asian operators see no deal-stopping threat from Huawei's equipment, which is becoming increasingly prevalent in Ericsson's own traditional markets. The Chinese company, like Ericsson, now supplies all the big European operators, including Telefónica of Spain, Deutsche Telekom, France Télécom and Vodafone.

"In Huawei, we have found an excellent, trustworthy partner with many years of experience and a high degree of security awareness," said Heinz Herren, the head of the network and information technology division at Swisscom, the former Swiss monopoly. It signed this month a 400 million Swiss franc, or $429 million, deal with Huawei to build a high-speed optical fiber network that would eventually reach 80 percent of homes in the privacy-conscious country.

Becoming the market leader in operator equipment is only one of Huawei's goals. It also wants to become a significant seller of smartphones and corporate network equipment, a lucrative but expensive sector to compete in that is dominated by U.S. companies like Cisco and Juniper Networks. In the fourth quarter, Huawei became the world's No.3 maker of smartphones, with 4.9 percent of the global market, trailing just Samsung and Apple, according to International Data Corp.

"If they are successful in what they are developing right now in corporate infrastructure and handsets, they can in revenue terms become two or three times as big as Ericsson," said Bengt Nordstrom, an industry consultant in Stockholm who worked as an engineer in the 1980s for Ericsson in China and Africa.

Huawei's success, Mr. Nordstrom said, is far from certain. No company, including Ericsson, has managed to dominate the three big segments of the telecom equipment business. And without sales in the United States, Ericsson's largest single market, which makes up nearly a quarter of sales, Huawei will probably not reach the top, he said.

Huawei does not share the pessimism. The amount of data flowing over mobile networks will increase 500-fold over the next decade, fueling demand for faster and improved network equipment.

"In this environment, we don't see it as one company winning or losing," said Mr. Sykes, the Huawei spokesman. "We think all boats are going to rise."